Want to learn how to trade forex? The most liquid, free-floating financial market is forex, or foreign exchange, the world’s largest market, with a turnover of more than $6 trillion daily.
Profit opportunities await those who know how to read what the markets are saying.
In this forex-trading guide, we’ll go over the advantages of forex trading, review the most common trading strategies, explore the 20 hundred most actively traded currency pairs, explain how forex trading works, and provide a summary of recent developments in 2024.
By completing this guide, you’ll know how to get started trading forex.
How to Trade Forex: How It Works
It means that you buy one currency while you sell another currency (at the same time). We trade currencies in pairs; the first currency in the pair is the base currency, and the second currency is the quote currency.
How to Trade Forex: Benefits
Liquidity and Accessibility
The forex market is very liquid. That means large amounts of currency can be bought and sold with little effect on the price. This usually makes it easier to get in and out of a position at good prices.
Also, the forex market operates around the clock throughout the week. Traders can work when it’s convenient for them.
Leverage and Margin
Another benefit of forex trading is that leveraged trading is generally available to help traders get better value from their capital.
The fact that they do not have to hold the entire value of a trade in their account means that they can trade much larger positions for the amount of capital they have in hand. This helps traders leverage their returns because as profits increase, so does their exposure, enabling them to take larger positions.
But leveraged trading also raises the risk of suffering losses that can outstrip their entire capital. Traders need to learn how to structure their leverage and margin to suit their capital and their trading strategies.
Diversification
Trading Forex offers a way to diversify a portfolio of investments, as different currency pairs offer different exposures.
The more different currencies that are traded, the better the spread of risk, reducing the impact of adverse market movements in any single market.
In addition to providing a steady income stream, this diversification also contributes to the stability of returns and performance of an investment portfolio.
How to trade forex: Low Transaction Costs
Concerning other financial markets, FX trading, on average, comes with lower transaction costs. Most FX brokers don’t charge commissions, and the biggest cost associated with FX trading is the bid-ask spread, that is, the difference between the bid price and the asking price for any given currency pair. Low costs open FX trading to a wide range of investors.
How to Trade Forex: Popular Methods
Spot Trading
Spot trading entails the direct exchange of one currency for another at the rate prevailing at the moment of the deal. This is the simplest form of forex trading. Spot trading lends itself to being employed by short-term traders or by those trading in the long term. It’s also very common because it makes up the vast majority of forex deals.
Forward Contracts
A forward contract is formed when two parties engage in an agreement to buy or sell at a set price on a future date. Typically, forward contracts are used by businesses and investors to hedge currency fluctuations which may occur in a predetermined time frame. Trading forex with forward contracts allows exposure to currencies in a predetermined exchange rate without the influence of currency volatility.
Futures Contracts
A forex futures contract is an agreement to buy or sell a currency at a certain price and time in the future. Futures contracts are traded on exchanges. Futures trading is mostly used by speculators, but there are many types of hedgers as well. The best way to trade forex is to learn how to trade forex using a futures contract.
How to trade forex – Options Trading
Options trading, buying or selling the right but not the obligation to exchange currencies for a specified price at an agreed date in the future, may be used, like spot forex, to speculate about the movement of currencies, either as a standalone position or as part of a hedging strategy to protect existing forex holdings. Options trading is a valuable skill to learn to extend the reach and effectiveness of someone’s forex trading.
How to Trade Forex: Top 10 Currency Pairs
The best way to learn how to trade forex is to dive into the top currency pairs. Check out our list below:
The most-traded form of the euro, EUR/USD is the liquid queen of currency pairs, with tight spreads.
How to Trade: Quite a few of them use a technical analysis approach, with traders’ attention centered on important support and resistance levels. Meanwhile, fundamental analysis plays a big role, as any economic data release from the Eurozone and the US – be it GDP numbers, employment figures, or central bank decisions – will almost always make the front page of other finance portals.
USD/JPY…
US dollar against the Japanese yen
This is a major currency pair representing markets where dollar spreads are low and liquidity is high.
What To Trade: Watch. That’s about all you can do with the pair at this point; inspiration is the key here. The market is highly sensitive to geopolitical events and risk sentiment, and it’s also one spot where day traders compete with macro-star traders. (Remember, the dollar is the global benchmark currency.)
GBP/USD
Volatile and traded in gigantic volumes, the British pound against the dollar is a major global currency pair.
How to Trade: Follow UK economic news, especially inflation, employment, and GDP, as well as Brexit news and Bank of England policy statements, which are key drivers behind the pair.
USD/CHF
USDCHF (US dollar against the Swiss franc). This pair is considered a safe haven asset.
How To Trade: Traders use this pair to hedge risk. Swiss economic data and European geopolitical stability are also factors. Pay attention to global risk sentiment and flow into safe havens.
AUD/USD
The Australian dollar against the US dollar. Influenced by commodity prices, particularly gold.
Gold and iron ore prices, although weakening, strongly influence commodity prices. • Australian economic data, in particular, and RBA policy are catalysts.
USD/CAD
The US buck against the Loonie (Canadian dollar) – Also commodity prices, especially oil. – Oil prices are a major trading catalyst in this pair’s moves, along with other Canadian economic data and BoC statements. This pair is popular among traders who follow commodity markets.
NZD/USD
New Zealand dollar vs US dollar. Famous for its link to commodity prices and interest rate differentials.
How to Trade: Watch commodity markets and Reserve Bank of New Zealand policy surprises. This pair tends to respond to movements in global risk sentiment and economic releases from New Zealand.
EUR/GBP
The euro versus the British pound, in which the price of the euro is set against that of the British pound. Changes in this pair depend on the economic and political developments in the Eurozone and the UK.
Trading fundamentals: Brexit-related news and the announcements about the European Central Bank’s policy decisions are the main news that moves this pair. The actual economic data released from the Eurozone and the UK also influence the price action of this pair.
EUR/JPY
Euro/Japanese yen pair. A cross-currency pair. Quite a liquid pairing.
How to Trade: Traders should look out for European and Japanese economic figures. Both this pair and the AUDUSD is responsive to risk sentiment and global economic activity.
How to Trade Forex: More Top Currency Pairs
GBP/JPY
Here’s a reading from the graph: the British pound against the Japanese yen. Very volatile Exchange rates undergo large, frequent changes in their values.
How to Trade: Watch Japanese and UK economic data, as well as the policies of their central banks. These pairs are trade vehicles for those seeking volatility and large price swings.
EUR/CHF
The euro against the Swiss franc. Often used to hedge against euro-related risks.
How to Trade: Benefit from volatility in Eurozone central bank policy: asymmetric currency trades. Monitor economic developments and safe-haven flows in Switzerland.
AUD/JPY
Why Risk Sentiment and Commodity Prices Would Get the Aussie Moving Paraphrase: The Australian dollar compared with the Japanese yen. Risk sentiment and commodity prices will propel it.
How to trade: look at commodity prices and global risk sentiment. – A pair popular with carry traders for interest rate differentials.
NZD/JPY
New Zealand dollar versus Japanese yen. An interesting carry trade.
How to trade: Follow New Zealand economic news and global mood Markets don’t really show much interest in events from New Zealand, but the yield differential makes it a good carry trade piece.
CAD/JPY The Canadian dollar versus the Japanese yen. So we know it is influenced by the price of oil.
How to trade: Oil prices are the main influence here. Canadian and Japanese economic data and central bank policies are also relevant.
CHF/JPY
A neutral currency that can be traded against most others (the Swiss franc) versus a vulnerably exposed peripheral economy that cannot support its excessive borrowing, and is allowing its currency to decline.
How to Trade: Pay close attention to the mood of global risk appetite and the direction of economic conditions. The two pairs are often used together as hedging for risky assets – in particular, during periods of volatility in the market.
GBP/CHF
You’d want to trade pounds for Swiss francs. Unstable currencies that swing for big wins: volatility and large swings – that’s what you want as a trader.
How to Trade Keep an eye on UK economic data and Brexit developments, as well as Swiss economic indicators. Great for traders looking for volatility.
AUD/NZD
Australian Dollar vs New Zealand Dollar. react to developments in the economies of the two countries.How to Trade: Pay attention to interest rate differentials, as well as economic releases from both countries. Mostly used by speculators trying to ‘moderate out’ regional economic differences.
EUR/AUD The euro against the Australian dollar The double-border top shows a chart, representing the dynamics of the euro against the money of the country of Australia. This ratio is influenced by factors such as interest rate differentials, and economic data from the eurozone, and Australia.
How to trade: Exposed to European and Australian economic indicators; traders use it to diversify broader market risks.
GBP/AUD
The British pound versus the Australian dollar. volatile, even large swings in prices.
How to Trade: This pair is commonly driven by UK or Australian economic data, and the divergences in interest rates between those two countries. Traders looking for a high-volatility play like to trade this pair.
EUR/CAD
The euro against the Canadian dollar. Data-driven from economic data out of the Eurozone and Canada.
How to trade: pay attention to European economic data releases and Canadian commodity prices, especially oil. The policy stances of central banks in both regions matter too.
